Why do Collection Agencies Charge So Much?

Never forget: collection agencies are collecting from you as well. Collection agencies are profit-driven entities, and you are ultimately paying the price—the very high price. In this article, we take a look at why collection agencies charge so much and what you can do to avoid overpaying.

Why DO Collection Agencies Charge So Much?

-Why collection agencies exist- Pretty much every small business has had its share of delinquent customers, who are making all sorts of excuses. To have invoices paid, small businesses may find themselves sending invoices over and over again, making difficult collection calls and working out meaningless payment plans. Instead of constantly chasing down customers, some small businesses turn to third-party collection agencies. Collection agencies can do the grunt work for you, convincing customers to pay with written notices, phone calls and by hopefully working out a solution.

While this all may sound great, your customers might see collection agencies as contracted bullies. Although collection agency practices are regulated by the Fair Debt Collection Practices Act, credit collection agencies are often seen as harassers, rather than a positive source for debt solution. In fact, collection agencies have racked up over 300,000 complaints within five years, according to the book Fight Back Against Unfair Deb Collection Practices.

-How collection agencies charge- Collection agencies usually charge a percentage of the collected invoice; they sometimes charge up to 50 percent of the paid amount. Collection agencies will often calculate their fees based on the age the debt. In other words, the longer the invoice has gone unpaid, the greater the fee. For example, if your customer made the last payment 30 days ago, you may be charged 15 percent of the debt's worth. However, if your customer has not made a payment for six months, you might be charged 40 percent. The age of the debt can be calculated from the last day of activity on the account.

The costs of a collection agency do not end there. A collection agency may even charge you an additional fee for their services, regardless of whether or not the invoices are paid. You may even be charged for expenses such as background checks, filing fees or long-distance phone calls.

Ultimately, collection agencies know that small businesses would rather get a portion of their money than none at all, and many will happily take advantage of this difficult position.

-How to avoid mercenary collection companies- Collection agencies come in all shapes and sizes. Whether you choose a small or large company, you should keep an eye out for several red flags. You may want to make sure the collection agency is registered with both the Commercial Collection Agency Association and the Commercial Law League of America. These two agencies are ethical watchdogs. You should also contact the Better Business Bureau in the agency's area. Find out if the collection agency has received any significant complaints. Remember: A collection agency with poor business practices toward debtors can treat you just as poorly.

-Alternatives to consider- Before contacting a credit collection agency, you can turn up the heat on customers or try alternate third-party assistance. Companies like Funding Gates offer a friendlier alternative by: monitoring your customers, keeping an eye out for potential bumps like bankruptcies, liens and poor credit scores, sending payment reminders and working out installation plans. If you decide to opt for a credit collection agency, Funding Gates can also help you negotiate discounts with reputable agencies.

Collecting on invoices can be a trying and stressful experience. When faced with these challenges, always remember that you have many avenues available, and a solution lies ahead.